Point/nonpoint source trading of pollution abatement: choosing the right trading ratio

In programs for trading pollution abatement between point and nonpoint sources, the trading ratio specifies the rate at which nonpoint source abatement can be substituted for point source abatement. The appropriate value of this ratio is unclear because of qualitative differences between the two classes of sources. To identify the optimal trading ratio, we develop and analyze a model of point/nonpoint trading. We find the optimal trading ratio depends on the relative costs of enforcing point versus nonpoint reductions and on the uncertainty associated with nonpoint loadings. The uncertainty does not imply a lower bound for the optimal trading ratio.